Auto Manufacturers company NIO is standing out today, surging to $10.21 and marking a 8.0% change. In comparison the S&P 500 moved only 1.2%. NIO is -67.73% below its average analyst target price of $31.64, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, NIO has underperfomed the S&P 500 by 59.7%, moving -76.6%.
NIO Inc. designs, develops, manufactures, and sells smart electric vehicles in China. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items. This is why these companies are called "cyclical."
NIO does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-0.21 and $-0.7. We can see that NIO has a forward P/E ratio of -48.6 and a trailing P/E ratio of -14.5.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer cyclical sector has an average P/E ratio of 24.11, and the average for the S&P 500 is 15.97.
NIO’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for NIO, we obtain a PEG ratio of 762.6, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of NIO's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
- 2021 operating margins: -29.2 %
- 2020 operating margins: -34.5 %
- 2019 operating margins: -145.9 %
- 2018 operating margins: -471.6 %
- Average operating margins: -170.3 %
- Average operating margins growth rate: 53.6 %
- Coefficient of variability (lower numbers indicate less volatility): 122.1 %
NIO's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
- 2021 free cash flow: $-2,112,378,000.00
- 2020 free cash flow: $823,208,000.00
- 2019 free cash flow: $-10,428,493,000.00
- 2018 free cash flow: $-10,555,732,000.00
- Average free cash flow: $-5,568,348,750.00
- Average free cash flown growth rate: -82.5 %
- Coefficient of variability (lower numbers indicating more stability): 104.4 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for NIO, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
NIO's P/B ratio of 0.5 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Consumer Cyclical sector was 3.11 as of the third quarter of 2022.
With a negative P/E ratio, an exceptionally low P/B ratio, and an irregular stream of negative cash flows with a downwards trend, we can conclude that NIO is probably overvalued at current prices. The stock presents poor growth indicators because of its negative operating margins with high variability that are increasing, and an inflated PEG ratio. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!
